December 9, 2022

The premium for 1Q 2023 aluminum deliveries into Japan will likely be approximately $95/mt, a 4% price drop from 4Q 2022 and the lowest since 2020, according to Bloomberg. This is the premium over the London Metal Exchange (LME) cash price that Japanese importers agree to pay for primary aluminum shipments. These premiums, which are set on a quarterly basis, are negotiated directly between Japanese end-users and global aluminum producers. At least one Japanese aluminum producer offered this $95/mt premium, thereby signaling what pricing other buyers are likely to pay. This premium has dropped in recent quarters as demand, specifically from the automotive sector, has softened, according to Bloomberg.  Japan imported approximately 2.793 million mt of aluminum in 2021, or about 4% of global production, according to the Japan Ministry of Finance and USGS data. (Sources: Bloomberg, Japan Ministry of Finance, USGS)

US aluminum consumers should watch closely what is happening in Japan because it could foretell changing trade flows and weakening prices. Already, Japan's premiums (over LME pricing) are shrinking, signaling that manufacturing is turning away the supply of metal. The displacement is likely to send the metal to other importing countries. As aluminum shipments are rerouted, the immediate result could be lower premiums in North America, represented most commonly by MWP. More broadly, AEGIS wonders if these shrinking premiums are a sign of emerging, persistent oversupply. Consumers looking to hedge aluminum may wish to elect hedging structures tailored to participate in lower prices while protecting against higher prices. One popular way of hedging LME aluminum is with zero-cost (or "costless") collars, and we would love to talk you through those strategies.

As for the Midwest Premium, this market can be hedged via CME MWP swaps. Like the Japanese import premium, the CME MWP has also fallen in recent months. Please note that there is no options market for the CME MWP. The CME Midwest Premium swap market is thinly traded, so hedging in that market is tricky. Thus, we recommend using limit orders. Again, please contact AEGIS for specific strategies that fit your operations. (12/9/2022)

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